Sunk cost fallacy: what it is and how it exacerbates problems

This failure of reasoning leads us to hold on to failed projects.

Fallacies are cognitive biases through which reality is veiled, giving an appearance of verisimilitude to what in its essence is uncertain or outright false. Almost all people have incurred in them at some time, and/or have been "victims" of someone else's, at least at some point in their lives.

Most fallacies mislead third parties, but there are also those that only distort the truth of the person who utters them, to such an extent that they reduce his or her ability to make the right decisions in a problematic situation.

In this article we will deal with the sunk cost fallacy or the Concorde fallacy. (in homage to an airplane created by the French government and that supposed enormous losses for this country), which has been the object of much research because of how it can condition the destiny of those who fall into its nets.

Basic principles of the sunk cost fallacy

The sunk cost fallacy is perhaps one of the most common cognitive biases in the life of every human being.. It is also known that, on many occasions, it has very serious consequences for those who fall into it (as well as for their immediate environment). The convergence between its frequency and its potential damage makes it an object of great interest for psychology, logic and even economics. And the fact is that, even if we insist on believing otherwise, sometimes our decisions are far from rational and rational.

Sunk cost is understood to be any investment that, due to objective circumstances, appears to be absolutely irrecoverable.. Such an investment can be understood in temporal terms, as a major outlay or as the satisfaction of what was once perceived as a basic need for happiness and/or self-realization. Thus, this concept includes any relevant effort in the past for which any expectation of return, cushioning or compensation has been diluted.

It is also known that the appreciation one has for what one has invested in (be it a work project, a relationship, etc.) is directly proportional to the amount of personal effort it required, in terms of emotional attachment or outcome expectations. And in turn, it is well known that the greater the attachment to anything, the more difficult it is to let go of it. or abandon efforts to keep it afloat. Everything described here is the foundation on which the sunk cost fallacy is built.

The main problem of this fallacy lies in the decision-making processes involving that person or project to which our past efforts, sometimes titanic and constant, are attached. Despite the fact that there is no option of recovering the investment that they entailed, we continue to keep the past in mind when it comes to assuming alternatives for change for the present.We tend to refuse to lose everything that once cost us, or to liquidate the expectations that once motivated us to undertake what we would now leave behind.

With the incorporation of the loss, located in the past and completely irrecoverable, the decision-making process is conditioned by elements alien to rationality (understood as the weighed analysis of the potential benefits and drawbacks both in the short and long term). In this way, we would not choose options aimed at obtaining positive things (a better job, a relationship that brings us more happiness or simply the cessation of some economic hemorrhage), but rather the ultimate purpose will be to avoid something for which it is certainly already too late..

The consequences of this fallacy can be truly dramatic, and are often at the root of personal failures and economic downturns. In fact, it is a concept that economics has rescued to understand what lies behind the losses of its clients' wealth. Below we will see how it can lead people to act, and why it often leads to situations that only deepen the problem.

What is this fallacy and how it works

In short, the sunk cost fallacy is a cognitive bias that consists in giving value to a relevant personal investment of the past, and clearly irrecoverable, in order to keep afloat a project whose expectations are very discouraging. whose expectations are very discouraging. In this way, the effort would be maintained by the expectation of recovering what has been given (money, time, etc.) without realizing that it is really something that will never return. In short, a refusal to give in to a threatening reality due to the fear of assuming the loss, which can end up worsening the situation seriously.

Most of us have experienced in our own skin the difficulty to give up, to give up on something even though we are aware that it is a lost cause. It is, in fact, a harmful way of insisting a harmful way of insistingIt is, in fact, a harmful way of insisting, which harbors the hope that a stroke of luck (or hitting the right key) will diametrically change the situation and we will be able to right the course in an ocean whose swell threatens to sink us under its unfathomable depths.

The sunk cost fallacy is a bias that prevents us from letting go of the past because of the emotional attachment we forge with it, even though it has no resonance for the present. It often involves maintaining all efforts towards something that no longer brings us happiness. This happens because we become victims of an irresolvable dissonance: "I have invested a lot, everything I had, in this... I cannot abandon it now, because it has not yet brought me anything good".

Some mental health problems are formed around this fallacy, especially pathological gambling. In these cases, the behaviors involved (gambling, gambling on a slot machine, etc.) generate losses and interpersonal conflicts of immeasurable magnitude, but the person concerned keeps up the habit because he has already "lost too much" and cannot afford to "give up his effort" without first having recovered at least a little of his investment. Obviously, the consequence is that the problem becomes increasingly worse prognosisThis leads to what is known as "hunting" (asking for money from acquaintances in order to recover from losses).

Moreover, it has been described that this fallacy also affects us when the person making the effort is someone we admire or love. Thus, if a person whom we hold in high esteem asks us for something and we do not feel like it, most of us will tend to give in and end up doing it (in compensation for the other person's investment, not our own). This is a familiar experience for a very relevant percentage of the general population, and it is the extension of this sunk cost fallacy to the social dimensions.

• You may be interested in "Are we rational or emotional beings?"

Some examples

With the purpose of clarifying how this fallacy or bias is expressed, we will see some concrete examples about different forms it can take according to what has been previously referred to.

1. A ruined project

Philip was young, and as such he was burning with the desire to carve with his own hands a future in which to live fully. For many years he combined a (weekend) job with his education, saving as much as possible to build his own business someday. When he had barely laid his hands on that hard-earned diploma, he was already fantasizing about the life he had always wanted for himself, building castles in the air about what his days would be like from then on.

Unfortunately, Felipe was still unaware that despite all the excitement, his project was going to be a failure, his project was going to be a failure that would cause him to lose everything he had saved during his youth.. More than a year had already passed, and the losses of his restaurant were increasing wildly, with no sign that the situation would change. Despite this, and given that he had invested too much in the opening, he decided to ask some people he trusted for money in the hope of making a comeback in the future.

2. Where are we going?

Vanessa and Miguel had been together for ten years, and in that time they had gone through all kinds of situations. Lying on a cold bed, appreciating the darkness seeping through the ceiling of the room, she meditated on her life with him. The first years were perhaps the most difficult, as her family did not accept the man she had chosen as her partner, and she fought against all odds to stay by his side in the worst of all possible scenarios. Despite this, she remembers that period as an adventure in which she learned a lot about what life was really about.

The sound of crickets reached her ears, in that night that seemed to go on forever. And the fact is that she no longer loved him. she no longer loved him, in fact she had not felt the same way for at least five years.. She hoped that the morning light would bring with it the strength she needed to articulate the words that would take them to the end of their shared road. It no longer made her happy, but she refused to believe that a story like theirs would die in such a mundane and sad way. They had spent so much time together... she was a jumble of doubts. Just another night, like so many others before.

3. A bad-looking cake

It was a Sunday afternoon. Just like other times in the past, Grandma Carlota brought what was once a fantastic carrot cake for dessert. It was not for nothing that she was a woman who had become well known for a recipe whose birth dated back to times that only she could remember. The years were beginning to accumulate in her snowy hair, and she was unfortunately entering the winter of her life. But at that moment, in the light of a dying autumn afternoon, the family ritual was about to begin. It was the only important thing.

The smile on her face was just as it had always been, as was the theatrical gesture with which she showed off her excellent creation. On that day, however, what everyone was waiting for with unbridled expectation turned out to be the most unexpected horror: it was not grandma's cake, but a shapeless mass with an unhealthy appearance, emitting a strange smell that immediately made the dog run away in pitiful sobs of panic.

Silence fell. Everyone looked at each other first, and at Grandma right after, with her smile on her face. The usual smile. "That looks good!" lied someone somewhere. With trembling hands and hearts in a fist, fearing that this was "poisonous", everyone gobbled down the usual generous ration. And the woman, who always gave her all and had gotten up early to lovingly prepare the meal, deserved it, and very much so.

Bibliographical references:

• Krämer, A. (2017). Demystifying the "Sunk Cost Fallacy": When Considering Fixed Cost in Decision-Making is Reasonable. Journal of Research in Marketing, 7, 510-517.
• Friedman, D., Pommerenke, K., Lukose, R., Milam, G. y Huberman, B. (2007). Searching for the Sunk Cost Fallacy. Experimental Economics. 10. 79-104.